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Illinois Court Issues Ruling in Bad Debt Case

Tax Development Nov 10, 2016

The Illinois Appellate Court recently provided guidance on the rights afforded to finance companies seeking refunds of Retailers’ Occupation Tax (“Tax”) associated with uncollectible credit card and installment contract debt. In the present case, Illinois retailers provided their Illinois customers with the option to finance purchases, including any applicable tax owed on the purchases. Financing was made available by a third-party finance company, which entered into an agreement with the retailers to originate or acquire the charge accounts from the retailers and in return, remit the financed amounts along with any applicable tax to the retailer. The retailer was responsible for remitting the tax to the state. Under this agreement, the finance company acquired all rights related to the accounts, including all payments and the right to claim any applicable tax refunds or credits.  

When consumers defaulted, leaving uncollectable balances that included amounts attributed to tax paid, the finance company wrote off the balances, claimed them as bad debt, and sought a refund of the portion of tax attributed to those unpaid balances. Initially, the Department issued a Notice of Tentative Denial, and the finance company requested an administrative hearing. In the hearing, the Administrative Law Judge concluded that the finance company’s claim should be denied for reasons that included, but were not limited to, the fact that they did not provide all required information, did not bear the burden for paying the tax, and the agreement they entered into did not give them a right to the tax refund. The finance company appealed to the Circuit Court of Cook County (“Court”), who reversed the Department’s denial. The Court’s ruling was based in part on the determination that the right to the tax refund had been properly transferred to the finance company and consequently, they were entitled to the refund. The full opinion can be found in Citibank, N.A. v. Ill. Dept. of Revenue, Appellate Court of Illinois, First District, No. 1-13-3650 & 1-15-0812, November 2, 2016.